In Defense of Corporate America

My company had its annual Finance Conference this week (“All Your Budgets Are Belong To Us”), and while I found a lot of things there interesting, I have no intention of imposing 50-odd hours of concentrated audit and tax details on innocent bystanders , although you’re on notice, Chico  – if you don’t shape up and behave I will find a way to force you to listen to me explain the history and structure of Sarbanes-Oxley’s Section 404 reporting requirements.  

 

Anyway, during the sessions of taxes, a few points were revisited about corporate taxes.  And to put it bluntly, the folks who hate corporations and like to claim they don’t pay enough in taxes, well, they’re lying when they make claims like that.

 

The U.S. has one of the highest corporate tax rates in the world. Only Brazil, Uzbekistan, Chad and Argentina have higher corporate tax rates than the U.S.  According to a research study by the Cato Institute, the effective U.S. corporate tax on new investment was 34.6% in 2010. This was higher than the average OECD rate of 18.6% and the average rate for 83 countries at 17.7%.

 

So, if the corporate rate is 34.6%, what’s with the claims that companies don’t pay taxes, or at least don’t pay enough?  In some cases it’s deliberate lying, but in others it’s just an exaggeration based on a failure to understand how taxes work for corporations.   PriceWaterhouseCoopers prepared a study from 2006 through 2009  examining Global Effective Tax Rates, which provides some insights.  By the way, an ‘effective tax rate‘ is what a company really pays, not the rate assigned by a government.  The effective rate can be lower, or higher, than the official rate declared by the government.  The PWC study discovered that US-based companies operating globally pay more than eight percentage points more in ETR than companies operating globally with a headquarters outside the US.  Consequently, this demonstrates not only that corporations pay a higher effective tax rate than individuals in the United States, the rates charged by the U.S. government are among the highest in the world, and US-based companies are penalized for putting their head office here.  Certain individual companies fare better than others, but on the whole attacks against corporations as tax cheats are false and defamatory.

 

There are a number of significant differences between corporations and individuals, including the bull’s eye on the bank of corporate leaders.  What I mean is, corporations don’t vote but people do, so a lot of politicians, pretty much everywhere, try to promise low taxes to people but increase taxes on corporations, especially if those businesses can be smeared as economic villains.  In reality, however, corporations represent jobs, economic growth and stability, and when government goes after corporations, then government is attacking jobs and GDP.   

 

In honor of Armed Forces Day
Is Iran linked to 9/11?
  • Canuck Chuck

    “But by taking advantage of myriad breaks and loopholes that other countries generally do not offer, United States corporations pay only slightly more on average than their counterparts in other industrial countries. And some American corporations use aggressive strategies to pay less — often far less — than their competitors abroad and at home. A Government Accountability Office study released in 2008 found that 55 percent of United States companies paid no federal income taxes during at least one year in a seven-year period it studied.”

    Oh, there’s more. Lots more.

    “The United States is virtually alone in trying to tax its multinational corporations on their foreign earnings, but it allows companies to avoid those taxes indefinitely by keeping profits overseas. That encourages companies to use accounting maneuvers to shift profits to low-tax countries and to invest profits offshore, says David S. Miller, a partner at Cadwalader, Wickersham & Taft in New York.

    Honeywell International, the New Jersey company that makes things as diverse as aerospace components and First Alert smoke detectors, reported in regulatory filings that in the last five years, it paid cash income taxes in the United States and abroad equal to 15 percent of its profits. On Friday, a Honeywell spokeswoman pointed out that the company had since made a large pension contribution, which effectively cut its profits and made its tax rate closer to 22 percent.

    A major domestic competitor, United Technologies, reported an average of 24 percent over that time. A German rival, Siemens, reported 29 percent of its total profit. “

    It’s hogwash that US overtaxes corporations.

    “Because some companies are so effective at minimizing taxes, the average works out to far less than the official rate. United States companies pay about a quarter of their profits in federal income taxes, a few percentage points higher than the rate paid by companies in most other major industrial countries, according to a number of studies and tax experts.

  • James H

    I have no intention of imposing 50-odd hours of concentrated audit and tax details on innocent bystanders

    So that’s how we got Khalid Shaikh Mohammed to tell us where to find Osama.

  • Chico

    DJ, guess what?

    I agree with you. Low corporate tax rates are a good idea.

    The tax structure should be redone to encourage long-term investment and discourage speculation.

    Cut corporate tax rates, and consider a Tobin Tax on financial churning.

  • DJ Drummond

    Canuck, according to the IRS, more than half the returns filed by individuals resulted in refunds, and the withholding taxes provided a total of $1.03 Trillion, out of $2.6 trillion brought in.

    http://www.taxfoundation.org/news/show/250.html

    This means that about $1.6 trillion was paid by businesses and corporations. Also, as I noted, the ETR is what is REALLY paid as a simple portion of taxes actually paid as a portion of net income; your cherry-picking of a few companies, and misrepresenting the tax liability of global corporations does not change the facts.

    For anyone who might have been swayed by Chuck’s hogwash, bear in mind that global companies

    A) Have to comply with tax law – the IRS spends considerably more enforcing corporate tax law than individuals, so the idea that companies are generally getting away with not paying their share is a stupid lie; and

    B) Chuck cheerfully neglects that companies operating overseas have to pay taxes in countries where they operate. The deferral of US taxes comes from making sure there is genuine liability, and for people who need the reminder, ‘deferral’ means paying later, not evading payment completely; and

    C) the taxes paid by any US public company are a matter of public record – just pull up the annual report for any year, or even the quarterly statement.

    You are a liar, Chuck. Or a brain-washed moron who never paid attention to basic math.

  • DJ Drummond

    Thanks Chico. What a lot of politicians forget, is that companies have choices, and if it costs too much to be based in the US, and especially if survivial means cutting costs (and taxes are undeniably a cost, adding no value or growth to a company, which makes them parasitical by definition), a company WILL move to a place it can afford.

  • Canuck Chuck

    “Slogging through your taxes right now? Maybe you could hire someone from General Electric (GE) to help.

    The company has beaten Uncle Sam. It paid no U.S. taxes for 2010, The New York Times reported. In fact, it received a tax benefit of $3.2 billion.

    It’s not that GE can claim poverty. The company rang up $14.2 billion in profits last year, including $5.1 billion from U.S. operations.

    How did GE do it? Through what the Times describes as “innovative accounting” and fierce lobbying, GE has been cutting its tax bill for years. In a stroke of genius, it hired a former Treasury official to lead its tax department and filled its team with former IRS employees and Congressional tax specialists.

    The top corporate tax rate is supposed to be 35% — one of the highest in the world. But few companies actually pay that rate, since there are myriad loopholes and other ways to get breaks. Now, the Times reports, only 6.6% of Uncle Sam’s tax revenue comes from corporations (down from 30% in the 1950s).”

    The GE situation isn’t unique. But thay are good at it – and it’s nothing new.

    While GE might be celebrating, critics call its tax benefits unfair. It’s one thing to seek out a few loopholes here and there, but it’s another thing entirely to try to profit from the system. “In our system, there are corporations that view their tax departments as a profit center,” one former Treasury official told the Times.

    Even former President Ronald Reagan was annoyed by GE’s tax shenanigans. Reagan overhauled the tax system after learning that GE was avoiding taxes with its aggressive accounting, the Times reports.

    “I didn’t realize things had gotten that far out of line,” Reagan told his Treasury secretary. He agreed with closing some tax loopholes and requiring GE to pay a rate that went as high as 32.5%.

    But with the kind of lobbying big guns that GE has, it didn’t take long for the company to begin seeking ways out of that tax rate.

    Just one example – a most egregious one, to be sure.

  • Bruce Henry

    You should read the comments on the page you link to, DJ. The commenters make some pretty good points.

    Among them:
    Who is going to pay for the protection of the supply lines these giant companies depend on? Brazil and the Czech Republic don’t maintain massive navies and air forces in the Persian Gulf to protect Middle East oil supplies, for instance. These companies want their supply lines protected, they just don’t want to pay for it. Freeloaders.

    And also:
    The page doesn’t show the methodology or data Cato used to arrive at their assertion. I’m not saying the Cato Institute is biased and can’t be trusted – I’m just saying they are biased and can’t be trusted. What I’ve always heard, and what I understand the general consensus to be, is that, yes, US corporate tax rates are indeed high, but the EFFECTIVE rate is much lower. Matter of fact, I’ve often read that about 60% of US corporations pay no federal income taxes at all. Now here comes Cato to assert without showing us their data that that that is not the case. I don’t take the Cato Institute’s word on this.

  • Mike Giles

    Matter of fact, I’ve often read that about 60% of US corporations pay no federal income taxes at all.

    Then it should be fairly easy to find them,and point them out, as I know the statement below, made by DJ is correct.

    C) the taxes paid by any US public company are a matter of public record – just pull up the annual report for any year, or even the quarterly statement.

    Simply claiming bias, and dismissing a point, won’t do. You should be able to show that 60% of PROFITABLE corporations are skating on their taxes, fairly easily.

  • epador

    Loosely applying the term “corporation” to businesses in general is a NewSpeak trick to depersonalize and demonize.

    Employers, including corporations, pay many different taxes and fees that go to Federal, local and state governments and their programs, which I would guess may be part of the Cato calculations. When a business is large enough, a 10-15% profit margin can seem huge and greedy. Look at an 8% profit margin I had and think about it:

    When I had my own practice, I figured about 42% of my gross income went to pay unemployment, employer contribution for SS (up to about 7.4% this year I think), worker’s compensation, local taxes, State taxes, gas taxes, sales taxes and my taxes on Schedule C income. I said GROSS INCOME. My profit margin was quite narrow, as my other costs were about 50% of gross income (malpractice, rent, drugs and employee pay and benefits). Think about that the next time you complain how much an office visit costs. After 17 years of that crap I left Michigan and private practice and have no intention to go back (to Michigan or into private practice) as long as the business climate remains the same.

  • Bruce Henry

    Mike, you misunderstand me. I am not asserting that 60% of corporations pay no taxes. I’m saying that I’ve often read that little factoid, but making no claims as to its accuracy. More important, though, is the claim by Cato that US corporations pay an EFFECTIVE tax rate of almost 35%. I have always understood that 35% is the statutory highest rate, but that most big businesses pay nowhere near that. Now along comes Cato to assert that the conventional wisdom is false on this point. I’m afraid I don’t accept their assertion at face value.

    Now, what about the point that SOMEONE has to pay for a massive military to protect these companies’ supply chains? Is that why Luxembourg and Belgium can have a lower tax rate, because their expenses are lower?

  • DJ Drummond

    Your problem,Bruce, is that you have made assertions without viable support. You have claimed that some companies get away w/o paying enough taxes. I have pointed out that this is cherry-picking, and noted evidence not only from one of the largest audit firms in the world (PWC), but also complementary evidence from the IRS and the simple means to verify using corporate financial statements; you just have to look on one line of the reports for each company of interest. You have also failed to provide links in support of your contentions. Saying you agree with comments left by readers on another place does not demonstrate that your own opinion is factual or accurate.

  • A Government Accountability Office study released in 2008 found that 55 percent of United States companies paid no federal income taxes during at least one year in a seven-year period it sudied.

    Actually, it was 57 percent of large corporations. Not including small corporations. Or the several other types of companies.

    P.S. It’s not surprising – over the 1998-2005 period covered by the report – that the majority of large corporations had at least one year without turning a profit (hence no taxes, without any need for “loopholes” or other nonsensical claims). Dot-com bust, anyone?

  • DJ Drummond

    Regarding the effective rate, Bruce, the problem for many global companies is the risk of being charged taxes for the same business, both by the country where the sale takes place and by the nation in which the corporation is headquartered. This is especially true in developing nations where corruption is common, like Russia or Nigeria. Deferral of taxes is granted because the paperwork can be complex, especially when foreign governments refuse to document the taxes they receive for more than a year after taking the money. If a company is not very careful to use good internal controls, understand the law in every country it operates, and recognize risk ahead of transactions, it can very easily end up paying an effective rate higher than the highest statutory rate in their home nation, because of these factors.

  • Jim Addison

    DJ, that accounts for most of the difference between the marginal and “effective” corporate rates – the USA is the only one of the top ten economies to tax overseas (after foreign taxes) earnings upon repatriation. So companies just leave those profits with the overseas affiliates to fund modernization and expansion of facilities.

    God forbid they should bring that money back to the USA to invest and create jobs here! That would be awful!

    Leftists have no clue how wealth is created – it is one of those areas where you have to be functionally ignorant to be a leftist. Environmental protection is another: what is the closest direct correlating figure to a nation’s effort to protect its environment?

  • Mark Vargus

    One thing I noticed a few years ago is that just about every time a US-based company merges with one based outside the US, the new company HQ is NOT in the US. The US tax laws which are demagogued to “punish” corporations only ends up lowering the long term tax revenues as the corporations take legal remedies to the tax levels.

    Another great example has been the fact that many US based companies have bee seeing very high profits for the last two years, but a large portion of those profits were achieved overseas. A foreign company that makes money in the US does pay US taxes, but then can use the fact that they paid US taxes to reduce the taxes in their home country. The US does not allow a similar deduction on foreign taxes paid and in fact taxes as income any money brought into the US from overseas operations. I’ve read a few studies that suggest that over $1 billion is currently sitting in foreign banks and being invested in operatiosn overseas by US companies because they do not want to pay the taxes involved in bringing those funds to the US. The corporations are cash poor in the US even though they have massive cash holdings overseas.

    but as the previous poster noted your average leftist doesn’t understand how business works and thinks you can tax a corporatoin at 100% and not influence its decisions at all.

  • Bruce Henry

    Fine. Say I’m totally clueless about the effective tax rate issue, and the Cato Institute’s word is golden.

    Who pays for the protection of supply chains, especially oil? Abu Dhabi can afford a lower tax rate because the US taxpayer pays to protect it.

    Unless these giant companies want to fund their own private navies and provide their own nuclear umbrella perhaps they should see the logic of the US having higher taxes than Taiwan.

  • Tina S

    I agree there is legitimicy to the argument of lowering the corporate tax rate. However, any decrease in the corporate tax rate would need to be accompanied by closing of loopholes.

  • Bruce Henry

    After over 4 hours my comment # 16 gets 5 negative votes but no refutation. Heh.

  • DJ Drummond

    Tina, if we’re going to discuss “loopholes”, please be specific. Give an example of a loophole in the tax code, what should specifically be done to eliminate it, and what effects such action will have, keeping in mind that this is not a vacuum, if the “loophole” turns out to have a salient purpose it’s elimination will result in negative revenue consequences.

    Bruce, no one has responded because your question was too vague. In terms of supply, most contracts are governed by Incoterms, and these address title and risk transfer questions, along with other material points. Please give a specific company and project, and note where risk transfer takes place in the contracts. Your question seems to imply that the primary risk in global commerce is either terrorism or piracy, which would be a mis-statement at best.

  • DJ Drummond

    Tina, if we’re going to discuss “loopholes”, please be specific. Give an example of a loophole in the tax code, what should specifically be done to eliminate it, and what effects such action will have, keeping in mind that this is not a vacuum, if the “loophole” turns out to have a salient purpose it’s elimination will result in negative revenue consequences.

    Bruce, no one has responded because your question was too vague. In terms of supply, most contracts are governed by Incoterms, and these address title and risk transfer questions, along with other material points. Please give a specific company and project, and note where risk transfer takes place in the contracts. Your question seems to imply that the primary risk in global commerce is either terrorism or piracy, which would be a mis-statement at best.

  • DJ Drummond

    Tina, if we’re going to discuss “loopholes”, please be specific. Give an example of a loophole in the tax code, what should specifically be done to eliminate it, and what effects such action will have, keeping in mind that this is not a vacuum, if the “loophole” turns out to have a salient purpose it’s elimination will result in negative revenue consequences.

    Bruce, no one has responded because your question was too vague. In terms of supply, most contracts are governed by Incoterms, and these address title and risk transfer questions, along with other material points. Please give a specific company and project, and note where risk transfer takes place in the contracts. Your question seems to imply that the primary risk in global commerce is either terrorism or piracy, which would be a mis-statement at best.

  • DJ Drummond

    Tina, if we’re going to discuss “loopholes”, please be specific. Give an example of a loophole in the tax code, what should specifically be done to eliminate it, and what effects such action will have, keeping in mind that this is not a vacuum, if the “loophole” turns out to have a salient purpose it’s elimination will result in negative revenue consequences.

    Bruce, no one has responded because your question was too vague. In terms of supply, most contracts are governed by Incoterms, and these address title and risk transfer questions, along with other material points. Please give a specific company and project, and note where risk transfer takes place in the contracts. Your question seems to imply that the primary risk in global commerce is either terrorism or piracy, which would be a mis-statement at best.

  • Bruce Henry

    Well, thanks DJ, but long analytical articles aren’t my job, they’re yours.

    And I don’t know that my question implies that the “primary” risk in global commerce is terrorism or piracy (or that it would be a mis-statement if it did). But terrorism and piracy are indeed risks of some importance, and the US spends enormous amounts of money to guard militarily against those threats. That’s money and effort that Taiwan, Brazil, and even China don’t have to spend. Maybe I’m being too simplistic but what is the answer to my question? Who pays? The working stiff here in the US or a giant international corporation who seems to want to get something for nothing?

    Because you can bet your ass that, when Somali pirates sieze an oil tanker, or Iran starts making noises about closing the Straits of Hormuz, the CEO of Exxon gets on the horn and wants to know what the hell the US is gonna do about it.

  • DJ Drummond

    Thanks for your evasion, Bruce – it speaks volumes about your credibility on this issue.

    I answered your question by explaining its lack of cogency, and in return you whimpered about not being able to do analysis. Problem is, I only asked you to ask a clear, on-topic question which pertains to the discussion, instead of tossing out some dried-our talking point you recall from a DNC soundbyte from a few elections ago.

    Oh, and to your earlier snide comment about ‘no answers in 4 hours’, that also shows a rather juvenile mindset of yours. Folks have lives and don’t get around to reading a day-old article on a regular basis, nor are they obligated to respond to a vague, off-topic spin attempt. Or, to put it another way, there are literally dozens of articles I have posted here to which you never responded – by your own standard we should conclude that you agreed completely with me, right?

  • Bruce Henry

    Sometimes, yes. And I was remarking on the fact that, although these folks have lives, they could take the time to read and cast a negative vote on my comment, but couldn’t be troubled to explain why. Which is fine, I just thought it was kinda funny.

    And I thought the reason there was no response was that my comment was “too vague.” Now it turns out that others were simply too busy. Which is it?

    And here is the cogency, DJ: Your article was about US corporate taxes being higher than other countries’ corporate taxes. I pointed out a possible reason why that would be so – that the US must spend hundreds of billions that other countries don’t have to spend, in order to maintain a huge military, which multinational companies benefit from immensely. My point, again, is that unless these giant firms wish to maintain their own navies and air forces, perhaps they should pay their US taxes more willingly, since we act as the world’s policeman, and Taiwan and Croatia do not.

    Your response, when it came, was not helpful. It was a silly attempt to show off your vast knowledge of the arcane workings of international contract law and put me on the defensive since mine is much more limited. Well, guess what? I STIPULATE that you know more about international contracts, etc., than I do. My question, which I echoed from a commenter on the page you linked to, was not about that. It was much simpler, even, perhaps, as I said, simplistic: Why shouldn’t these giant corporations pay for the protections afforded them by our military?

    I don’t see how it was off topic, nor do I see why it was so offensive to you. So much so that your response has to include words like “juvenile,” “snide,” “whimper,” “whine,” etc. Words that I did not use in addressing you, sir. And, I note, no one has addressed it yet.

  • hcddbz

    Bruce,

    Your assertion that American companies should pay the highest tax rates might make sense if funding the US military and projection of power abroad were primary concerns of the people who cry for higher taxes. Military funding is always their primary target for reduction of tax proceeds.

  • DJ Drummond

    ** sigh **

    Bruce, still doesn’t get it. OK, one last appeal to reason:

    Bruce: “I thought the reason there was no response was that my comment was “too vague.” Now it turns out that others were simply too busy. Which is it?”

    Neither, both, and you still don’t grasp that it’s not about you. I write all the time, and some of my stuff provokes a lot of comment, some very little, but in the end that means nothing at all about the quality of my work. No one, and I mean no one, is obligated to respond to something written in a blog, and by that same logic you have no claim to expect anyone to write back just because you make a comment. You tried to claim some kind of score just because no one felt like answering you. Some might have been too busy, some might have found your question unclear, some might well have decided you were not following the discussion and ignored a non-seqitur, and so on.

    So, just to be very clear – No one has any duty to answer you, Bruce, and whether they do or not does not mean that you have accomplished anything.

    Bruce: And here is the cogency, DJ: Your article was about US corporate taxes being higher than other countries’ corporate taxes. I pointed out a possible reason why that would be so – that the US must spend hundreds of billions that other countries don’t have to spend, in order to maintain a huge military, which multinational companies benefit from immensely.”

    And I explained to you Bruce that you are using a false logic to impose a causality between military and business expenses and opportunity. Your claim implies that one primary mission of our military is to create an advantage for US businesses, and that all global businesses benefit from the presence of our military. Both of those claims are far from true. This why I noted that military action is a very small factor, both in terms of incidence and significance. Risk that force will be used against a company is far lower than the risks of default, compliance violations, or contract disputes. As a result, your contentions fail ab initio, in the same way that arguing about the company’s logo has nothing to do with it’s performance metrics.

    Bruce: “Your response, when it came, was not helpful.”

    Only because you never even tried to understand. You are either unable or unwilling to follow the topic. In either case the fault is your own.

  • Bruce Henry

    Well of course you did, DJ.

    [Bruce, you went off a piss-faced rant. Start your own blog if you want something like that to not get unpublished. In the meantime, grow up a bit and make a serious effort to stay on topic next time – DJD]